@SymQNA: If you wish to ensure first it's really corresponding to this known issue fixed on RU2 MP1, just run a SymHelp tool or look on your Windows Server 2003 Server for the "Log.LiveUpdate" file or "Log.Lue".

Open it with notepad or notepad++. Search for the error message you get related to unable to extract/to decompress. If you see some error code 500 or 502, 503. It's matching completely with this known issue so upgrade your client to SEP 12.1 RU2 MP and you will get rid of this